How Superstar Pay Stifles; Reagan Deregulation Led to Financial Blowup

[FattyCatty]

This article (http://www.nytimes.com/2010/12/26/business/26excerpt.html?pagewanted=1&ref=general&src=me) in The New York Times talks about how Superstar pay stifles everyone else; the Superstars aren't just athletes and entertainers. I don't know anything about economics, but the article was interesting to me (I had just read the thread on Executives and Bonuses). It provided an explanation for something I didn't understand in a way even I could understand. A minor miracle.:D
<snip> But broader forces are also at play. Nearly 30 years ago, Sherwin Rosen, an economist from the University of Chicago, proposed an elegant theory to explain the general pattern. In an article entitled “The Economics of Superstars,” he argued that technological changes would allow the best performers in a given field to serve a bigger market and thus reap a greater share of its revenue. But this would also reduce the spoils available to the less gifted in the business.
<snip>
IF one loosens slightly the role played by technological progress, Dr. Rosen’s framework also does a pretty good job explaining the evolution of executive pay. In 1977, an elite chief executive working at one of America’s top 100 companies earned about 50 times the wage of its average worker. Three decades later, the nation’s best-paid C.E.O.’s made about 1,100 times the pay of a worker on the production line.So what do you think: is he right about why some people get paid so much more? Is this something everybody else already knew?

More importantly to me, I feel vindicated. The article (briefly) mentions something I have long believed: Reagan's deregulation of the banking industry led to the financial blowup. Just like I believe deregulation of the airline industry led to problems there. Can you tell I believe in more regulation, not less?:)
<snip> This ebb and flow of compensation mimics the waxing and waning of restrictions governing finance. A century ago, there were virtually no regulations to restrain banks’ creativity and speculative urges. They could invest where they wanted, deploy depositors’ money as they saw fit. But after the Great Depression, President Franklin D. Roosevelt set up a plethora of restrictions to avoid a repeat of the financial bubble that burst in 1929.
<snip>
Then, in the 1980s, the Reagan administration unleashed a surge of deregulation. By 1999, the Glass-Steagall Act lay repealed. Banks could commingle with insurance companies at will. Ceilings on interest rates vanished. Banks could open branches anywhere. Unsurprisingly, the most highly educated returned to banking and finance. By 2005, the share of workers in the finance industry with a college education exceeded that of other industries by nearly 20 percentage points. By 2006, pay in the financial sector was again 70 percent higher than wages elsewhere in the private sector. A third of the 2009 Princeton graduates who got jobs after graduation went into finance; 6.3 percent took jobs in government.

Then the financial industry blew up, taking out a good chunk of the world economy.
Do you agree that deregulation led to the banking meltdown? I think he's saying that regulation is good for the country, deregulation is bad. Did I understand him correctly, or did I just conclude that because it's what I believe?

[NoZed Avenger]

More importantly to me, I feel vindicated. The article (briefly) mentions something I have long believed: Reagan's deregulation of the banking industry led to the financial blowup. Just like I believe deregulation of the airline industry led to problems there. Can you tell I believe in more regulation, not less?:)


* * *

Do you agree that deregulation led to the banking meltdown? I think he's saying that regulation is good for the country, deregulation is bad. Did I understand him correctly, or did I just conclude that because it's what I believe?


Banks could commingle with insurance companies at will. Ceilings on interest rates vanished. Banks could open branches anywhere.

I am having trouble with the link (work computer) - does the article say how the quoted changes you list actually led to the crises 20+ yeas later, because the portion you quoted just says that sometime later, the crash occurred.

IIRC, the banks who had commingled with insurance companies were not the ones in the most trouble. But that is purely from memory; I could be way off.

[FattyCatty]

I am having trouble with the link (work computer) - does the article say how the quoted changes you list actually led to the crises 20+ yeas later, because the portion you quoted just says that sometime later, the crash occurred.

IIRC, the banks who had commingled with insurance companies were not the ones in the most trouble. But that is purely from memory; I could be way off.I don't know if this answers your questions, but it is more from the article. Remember, the article was only touching briefly on this. I don't know if his book (from which the article was developed) covers this subject in more detail.

For my part, and again emphasizing that I know nothing of economics, I have always felt that deregulation unleashed the unbridled greed and lack of concern for the good of the country as a whole that we have seen in the banking industry and, I feel, in the health-care industry. I thought the author was saying that deregulation didn't really help the country, and, in fact, contributed to lack of economic mobility.
Ultimately, the question is this: How much inequality is necessary? It is true that the nation grew quite fast as inequality soared over the last three decades. Since 1980, the country’s gross domestic product per person has increased about 69 percent, even as the share of income accruing to the richest 1 percent of the population jumped to 36 percent from 22 percent. But the economy grew even faster — 83 percent per capita — from 1951 to 1980, when inequality declined when measured as the share of national income going to the very top of the population.

One study concluded that each percentage-point increase in the share of national income channeled to the top 10 percent of Americans since 1960 led to an increase of 0.12 percentage points in the annual rate of economic growth — hardly an enormous boost. The cost for this tonic seems to be a drastic decline in Americans’ economic mobility. Since 1980, the weekly wage of the average worker on the factory floor has increased little more than 3 percent, after inflation.
<snip>
NONE of this even begins to account for the damage caused by the superstar dynamics that shape the pay of American bankers.

Remember the ’80s? Gordon Gekko first sashayed across the silver screen. Ivan Boesky was jailed for insider trading. Michael Milken peddled junk bonds. In 1987, financial firms amassed a little less than a fifth of the profits of all American corporations. Wall Street bonuses totaled $2.6 billion — about $15,600 for each man and woman working there.

Yet by current standards, this era of legendary greed appears like a moment of uncommon restraint. In 2007, as the financial bubble built upon the American housing market reached its peak, financial companies accounted for a full third of the profits of the nation’s private sector. Wall Street bonuses hit a record $32.9 billion, or $177,000 a worker.

Just as technology gave pop stars a bigger fan base that could buy their CDs, download their singles and snap up their concert tickets, the combination of information technology and deregulation gave bankers an unprecedented opportunity to reap huge rewards. Investors piled into the top-rated funds that generated the highest returns. Rewards flowed in abundance to the most “productive” financiers, those that took the bigger risks and generated the biggest profits.
<snip>
Interstate banking had been limited since 1927. In 1933, the Glass-Steagall Act forbade commercial banks and investment banks from getting into each other’s business — separating deposit taking and lending from playing the markets. Interest-rate ceilings were also imposed that year. The move to regulate bankers continued in 1959 under President Dwight D. Eisenhower, who forbade mixing banks with insurance companies.

[Gawdzilla]

Interstate banking had been limited since 1927. In 1933, the Glass-Steagall Act forbade commercial banks and investment banks from getting into each other’s business — separating deposit taking and lending from playing the markets. Interest-rate ceilings were also imposed that year. The move to regulate bankers continued in 1959 under President Dwight D. Eisenhower, who forbade mixing banks with insurance companies.

Safeguards were put in place to prevent exactly what happened to the banks. The Reagonites removed those safeguards at the command of the people who bought them their offices.

[FattyCatty]

Safeguards were put in place to prevent exactly what happened to the banks. The Reagonites removed those safeguards at the command of the people who bought them their offices.Can I take this as agreement with my belief that deregulation was bad for the country?:D